Toronto homebuyers, get ready to pay an additional $65,000... just because

Toronto homebuyers, be prepared to pay at least $65,000 more on your new condo purchase, if a plan before the City of Toronto goes through.

Bear with us here as we try to explain this rather complex issue currently before the City of Toronto, and therefore facing the homebuilding industry, and prospective homebuyers.

At issue is something called Inclusionary Zoning (IZ). In September 2020, the City released policy proposals that provide its framework to guide the implementation of the construction of affordable housing units by private developers, as part of their planned developments, in and around provincial major transit station areas (PMTSAs). The City is calling these policies “inclusionary zoning.” However, according to the Building Industry and Land Development Association (BILD), because the proposals lack the fundamental components of an IZ policy, where offsets and incentives are included to counter potential market distortions, such policies may only be inclusionary zoning in name only, not in function.

Flawed approach

A new report from BILD concludes that Toronto’s proposed IZ policy will result in increased costs to purchasers, decreased new housing supply due to market distortions, and a flawed approach unique to the City’s IZ plan.

“Using this approach, the City of Toronto is essentially requiring purchasers of market rate housing units to subsidize affordable units at the rate of $65,000 and $116,000 per rental unit over the lifetime of the unit,” says Dave Wilkes, president and CEO, BILD. “Helping to provide affordable housing is everyone’s responsibility, and under this proposal the City is placing the burden solely on the back of purchasers of new homes. This, at a time when housing supply is already under great pressure and affordability is more elusive than ever.”

The report summarizes four independent studies that found deep flaws in the proposed approach to building affordable housing units.

The BILD report summarizes four studies conducted by independent experts. One was funded by the City, three others by the industry. Key findings, according to the organization, include:

• While inclusionary zoning policies are in place in a number of cities in North America, Toronto is taking an unprecedented approach that does not provide offsets or density bonuses to compensate for the cost of building the affordable units. It rushes to mandatory implementation and does not provide a cash-in-lieu option.
• The City already collects money for affordable housing from a new development through Development Charges, and soon under the new Community Benefit Charge (beginning Sept. 18, 2022) as well. The current proposal does not compensate $6,000 (combined) per unit and adds an incremental $65,000 in capital cost per new purchase unit and $116,000 per rental unit over its lifetime.
• Because of market distortions introduced by the City’s proposal, many projects will become financially non-viable. This will limit the supply and choice of homes available for new-home buyers, again impacting availability and affordability.

“Government fees, taxes and charges already account for almost a quarter of the cost of a new home in the GTA,” adds Wilkes. “It’s time for municipalities to realize that layering more costs into building housing is one of the root causes of our current housing crisis. Like any other industry, adding government taxes and fees into the cost of manufacturing a product, in this case housing, drives up the cost of the finished product. It is the responsibility of the industry to build complete communities; it is the responsibility of municipal governments to provide the conditions and the policies to enable this to happen.”

Extensive consultation

For its part, the City says its analysis shows that land values are able to accommodate the provision of new affordable housing units, without the need to pass these costs on through new housing prices. Toronto is proposing to implement IZ on lands that have benefitted from significant public investments in transit infrastructure, and where development densities have been updated to support transit. These public investments positively impact land values and, in return, the City is looking to create complete, equitable and inclusive communities.

In addition, according to Deanna Chorney, project manager of strategic initiatives, City of Toronto Planning division, the City is also proposing no minimum parking requirements for affordable housing created through IZ. Construction costs for a single underground parking space can range between $48,000 to $160,000.

Though the issue is coming to a head, the City says it has undertaken extensive consultation with the development industry, housing advocates and members of the public.

“Over the past three years, BILD has participated in 10 IZ stakeholder meetings with the City,” Chorney told NextHome. “BILD's consultants have also had two meetings with the City's financial assessment consultant, to conduct a line-by-line review of the City's financial pro forma analysis in order to ensure the City's inputs reflect current market conditions.”

Impact for homebuyers

So, besides what the industry says are additional added costs at precisely the wrong time, and other potential complications, what does it all mean for prospective homebuyers?

Chorney stresses that new and existing residents of Toronto will benefit from Inclusionary Zoning through the provision of more affordable housing options within new developments.

“Very little of the new housing produced in the city has been affordable to low- and moderate-income households,” she says. “Inclusionary Zoning will provide for more inclusive, mixed-income communities. Based on the City's analysis and advice from our consultant, NBLC (N. Barry Lyon Consultants Ltd.), we know there is room to require affordable housing in new developments without providing additional incentives to developers and without increasing new housing prices. These homes will be affordable to key workers in the city, such as grocery store salespeople, early childhood educators and registered nurses, earning between $32,000 and $91,000 a year.”

Developers, such as MOD Developments, builder of projects such as Waterworks and The Massey Tower, remain unconvinced.

“History has shown us that housing prices will rise when municipal policies increase costs,” Gary Switzer, CEO of MOD Developments, and a former Toronto city planner himself, told NextHome. “The City is starting from the flawed premise that inclusionary zoning will lower the price of land, and that this drop of land will make up for the loss of revenue that comes with selling 10 to 30 per cent of the units at affordable prices. This massive drop in land value did not occur when the HST was introduced in 1997, nor did it occur when the City’s Development Charges tripled over the last decade, or when parkland dedication fees doubled. Instead, these increased costs have resulted in higher and higher selling prices.”

As an alternative, Switzer suggests that if the City wants affordable housing included in all future high-density residential developments, it should be utilizing strategies that have proven successful in a number of other jurisdictions. “Under this IZ proposal, the City is offering developers no meaningful offsets or incentives to make up for the massive loss of revenue that the inclusion of 10- to 30-per-cent affordable housing in a typical condominium will result in.”

California, he points out, offers 35-per-cent density bonusing on any development that includes affordable housing; Los Angeles offers a 55-per-cent density bonus in designated transit-oriented development districts; New York City offers property tax exemptions on purpose-built rental projects that include affordable housing; and other municipalities provide waivers and reduction of municipal fees and charges for projects that include affordable housing. “Toronto is proposing nothing like this.”

The potential impact, BILD and others such as Switzer fear, is that many projects will no longer be financially viable and will not proceed. This will result in less market housing being built, and housing prices will continue to rise (as well as less revenue for the City).

“Not only will affordable housing not get built, but fewer and fewer market projects (except for perhaps very high-end developments), will proceed,” says Switzer.

BILD stresses its members support the use of IZ as a planning tool to enable municipalities to secure affordable housing in new developments, provided it includes a partnership model with municipalities that shares the risks and costs of building below market units.

“At this stage, the City of Toronto’s proposals do not reflect well established best practices, and will not achieve this necessary and vital goal,” says Wilkes.

The City is proposing a blunt approach, where IZ would be applicable to development applications beginning Jan. 1, 2022.

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